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A contribution to the debate on international reserves

International reserves serve as insurance, but keeping them entails costs, so there is a debate about their appropriate level.

For the version with all charts and tables, please open the attached pdf file

• International reserves serve as insurance in periods of stress and help reduce country risk in periods of stability. However, keeping reserves entails costs, so there is a debate about the appropriate level of reserves for each country.

• Brazil holds a comfortable reserves position – enough to satisfy the main criteria used to determine optimal reserves levels.

• A lot has been said about the high cost of carrying reserves, but they are a profitable asset over time. According to our estimates, since 2007, maintaining reserves has produced a positive financial result for Brazil when FX depreciation is considered.

• A small reduction in Brazil’s reserves – if policymakers so decide – would not compromise the country’s position according to the main metrics used to calculate their adequate levels. In our view, however, such an action should only be taken after the approval of fiscal reforms that will reduce risk premiums to consistently lower levels. We also note that, in periods of capital flight and elevated risk premiums, the market perception that countries have enough reserves tends to vanish.

Julia Gottlieb

For the version with all charts and tables, please open the attached pdf file